Four ways in which economies can grow back greener

By UK Government

Dr Ben Caldecott, global climate conference COP26 Strategy Advisor for Finance based out of the UK Cabinet Office, shares how governments can integrate climate risk into their financial decisions.

Even as the world grapples with Covid-19, the World Economic Forum has said that there is a historic opportunity to rethink the key tenets of our economic systems. The pandemic could be our chance to consider how we build a world that will be resilient against climate change.

“Green finance is a necessary condition for coping with climate change successfully”, says Dr Ben Caldecott, Director of the Oxford Sustainable Finance Programme at the University of
Oxford Smith School of Enterprise and the Environment, UK.

With sustainable finance as a key pillar of the UK’s Presidency of COP26, the UK is working with partners across Southeast Asia on shifting financial flows into more low-carbon and resilient investment.

What governments can do

If they aren’t already doing so, governments around the world need to consider the environmental impacts of their financial investments, says Caldecott. He offers four recommendations to do this.

The first is to incorporate climate risk assessments in all new projects. This would enable governments to proactively understand and mitigate the environmental impacts of the investment in the same way as they currently evaluate the economic consequences. With this information, they might then choose to avoid projects that harm the environment; for example, in the form of increased risk of floods or droughts in the area.

Second, governments can look at ways in which policy decisions align with the country’s green targets. “If you’ve got a net zero target,” Caldecott explains, “you shouldn’t be building infrastructure that’s going to commit to future emissions.” Towards this, UK became the first major economy in the world to pass a Net Zero Emissions Law in 2019 that applies to all sectors and industries - from housing and infrastructure to transport and energy.

Third, governments can hold companies accountable when they fail to consider how their investments may harm the environment. For instance, the UK banking sector has a Senior Managers Regime that certifies an organisation’s ‘map of responsibilities’. “So, if a climate risk assessment goes wrong, the organisation knows who is accountable,” says Caldecott.

Lastly, Caldecott urges governments that own companies to be “active owners” who empower management to make sustainable decisions underpinned by thorough climate risk analysis.

This is being done in countries like Singapore who have incorporated climate risk assessment into the Resilience Framework and in the UK, this is published in the Climate Change Risk Assessment (CCRA) report, with the next one CCRA3 being due in 2021.

However, authorities should also be careful not to shift their economy to depend solely on green industries too quickly, Caldecott warns. If investors only fund green projects, other ignored sectors may end up having a lot of “stranded assets”, making the economy unstable.

Balancing economic ambitions with environmental realities is not only prudent, it is vital to a successful, clean and resilient recovery.

Greening Southeast Asia’s economy

Countries in Southeast Asia have an opportunity to reconsider investing in unsustainable industries that are ‘incompatible with tackling climate change’, says Caldecott. He sees building the foundations of a green economic reset as a threefold approach.

First, by preserving the natural biodiversity, countries can simultaneously protect the environment and also create conditions for new employment, investments and sustainable development opportunities. For example, Southeast Asia’s rich marine biodiversity offers huge economic potential - from enabling livelihoods in fisheries to developing sustainable recreation and tourism opportunities.

Second, by regulating the climate impact of investments by country-level financial intuitions more stringently, governments can better plan their long-term resource deployments. For instance, this could mean regulators choose to make projects with higher environmental risks more expensive for investments. “At the moment, very often the risks aren’t priced,” Caldecott notes.

And lastly, by fostering extra government focus on supporting green tech and sustainable business models through capital access. “This is critical to deliver the kind of societal and environmental change that we need to be climate resilient”, says Caldecott.

He goes on to add, “If finance takes on the line of sustainability, projects with high climate-risk won't have access to capital and things that are needed to deliver sustainable solutions will get access to capital.”

Growth of green finance in the UK

“Systematically, the UK has been thinking about how finance is relevant to all of the different policy issues,” Caldecott says.

The Green Finance Strategy ensures that current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making.

The government is also actively directing more money into green projects. For instance, it has set up a green investment bank to channel private funds into green industries, says Caldecott.

The country has also introduced a new subsidy regime for renewable energy infrastructure that makes investors more willing to fund these projects. “Offshore wind, for one, has become one of the most economic forms of power generation in the UK, after being one of the most expensive,” Caldecott shares.

Earlier this week, the UK marked 60 days without coal power, a feat made possible by the falling costs of renewable sources of energy but also driven by a cross-sector commitment to Net Zero by 2050.

In addition, supervisory institutions in the country have put in place regulations to ensure organisations consider the environmental impact of every new project. “In 2015 the Bank of England recognised that, as the country’s financial supervisor, it had a responsibility to regulate the climate-risks in investments and it has been doing so ever since”, says Caldecott.

Other countries have followed suit. In Southeast Asia, Singapore, Malaysia, Vietnam and Indonesia have already announcing plans to create new supervisory expectations for regulating firms.

Caldecott believes that climate ambition needs to be matched by financial investments. “Only when governments become more green-minded with their resources, can we make progress towards a green recovery for the planet and our people.”